E-commerce soaring in China

BEIJING—Pan Ning is 25 and spends a lot of time at home on his computer, but his mother couldn't be happier. After all, Pan attends to a thriving business.

Like hundreds of thousands of Chinese, Pan has become an online vendor.

In many countries, entrepreneurs like Pan would open real stores. But rents in China's big cities are soaring, and the retail scene is scattered and often chaotic. Many vendors have set up virtual shops.

Electronic commerce is still in its infancy among China's 144 million Internet users, but it's beginning to take off. Registered online shoppers now number 43 million, and their purchases may hit $6.4 billion in 2007, a leap of more than 60 percent.

The ease of online sales has opened new opportunities for Chinese, empowering throngs of new young merchants, who are becoming pistons in China's economic engine.

"I'm thinking about hiring more people and expanding this business," Pan said one recent day in his family apartment in a middle-class building south of Beijing. "It's just too tiring for the three of us," he said, referring to himself, his mother and his fiancee.

After two years in business, Pan now sells up to $20,000 worth of cellular phone accessories a month. His fiancee handles online inquiries from shoppers—they get 200 to 300 orders a week—he deals with suppliers, and his mother, who also cooks for the family, packages orders for twice-a-day pickups by delivery services.

Stacked on a metal rack in the foyer of the apartment and in boxes on the floor are cell phone batteries, carrying straps, earphones, and, of course, Bluetooth devices.

"I have my own inventory," Pan said. "It doesn't look like much stuff. But I'm one of the biggest on the Internet."

Pan maintains his e-shop on Taobao.com, the largest of four Internet companies that dominate online shopping in China. Two of them—Dangdang.com and Joyo.com (a subsidiary of Amazon.com)—are conventional e-retailers, selling and delivering a variety of goods. The fourth company is eBay, the U.S.-based auction site that once was a market leader here but now faces a declining share of the online business.

Taobao.com, a subsidiary of Alibaba.com, has run away with the market.

"Taobao.com wants to be the largest retail company in China, outrunning the traditional retail giants like Wal-Mart and Carrefour," said Christina Splinder, a spokeswoman.

Already, some 6 million people a day shop on the Internet in China. The vast majority are young people living in large cities.

"E-shoppers are mostly 18 to 30 years old. We think the trend will expand to other age groups," said Wang Fang, an analyst at iResearch, a consultancy in Beijing.

Shopping in China is far different than in the West in terms of pricing, availability of goods and concentration of stores. Chain stores with multiple locations in the same city may price the same goods differently at each location.

So Chinese consumers seeking the lowest prices have turned to the Internet.

"On China's e-commerce Web sites, 90 percent of the products are new and have fixed pricing. They are not auctioned," Wang said.

Varying from the eBay model of online auctions, Taobao.com offers a fixed-price platform free to buyers and sellers. The Hangzhou-based company follows the Silicon Valley strategy of building up its customer base and later figuring out how to charge customers. Taobao.com doesn't generate any significant revenue at present, according to Splinder. But it has a 65 percent market share.

"They rolled the dice and said, `Fine, we won't lay charges on anyone.' What they are gambling on is building the audience," Wolf said.

Few e-vendors in China sell used goods. Collectibles are also scarce, although niche markets, such as military surplus goods, do well.

Most Chinese still don't use credit cards, and some buyers opt to pay cash on delivery of goods from postal carriers or courier companies. Online payment plans are slowly emerging. Taobao.com's parent company has one called Alipay, which collects payments from buyers, holds the funds in escrow and then turns them over to sellers.

Most online vendors hold other jobs, quitting only when business grows. Pan, who once worked in technical support at an Internet portal, first sold military surplus binoculars on the Internet, then cell phones, finally settling on mobile accessories.

Some vendors face opposition from family members to their business plans.

"My parents thought it was impossible for me to be successful," said Zhang Long, a 26-year-old diamond vendor whose Taobao e-shop is on target to hit nearly $1 million in sales this year. Now, they watch in amazement.

"I think sales will double, or even triple, in the next few years," Zhang said confidently.